A vendor take-back helps buyers who can't borrow the full amount from a bank.
How does a vendor take-back work?
SHORT ANSWER
The buyer pays most of the price at closing, often using a bank loan and their own money. The seller receives a promissory note for the rest, which the buyer repays over an agreed term.
Example: on a $3 million sale, the buyer pays $2.4 million at closing. The seller takes back a $600,000 note, repaid with interest over four years.
Why do buyers ask for vendor take-back financing?
SHORT ANSWER
Banks lend based on what the business's earnings can repay. When the bank won't cover the full gap, a VTB fills it. It also shows the buyer that the seller believes the business will keep performing.
For many buyers, the lender sets the ceiling, not the comparables. Banks size a loan so the business's earnings cover the payments with room to spare.
A buyer who says "3x is my limit" is often reporting what the bank approved. In that case, the useful conversation is about structure, such as vendor financing, rather than the multiple.
How does vendor financing compare with other ways to be paid?
SHORT ANSWER
Look beyond the headline price. Ten million dollars paid at closing is very different from ten million tied to a risky earn-out.
| Payment type | What it is | Seller's risk |
|---|---|---|
| Cash at closing | Paid on closing day | None. This is the only certain money |
| Vendor financing | You lend the buyer part of the price | Depends on the buyer's performance, usually ranks behind the bank |
| Earn-out | Paid only if future targets are hit | High. You no longer control the business that has to hit them |
| Rollover equity | You keep a minority stake in the buyer's company | Illiquid, and paid out on the buyer's timeline |
| Holdback or escrow | Part of the price held to cover your obligations | Released on schedule, reduced by valid claims |
Related: What is an earn-out when selling a business?
What are the risks for the seller?
SHORT ANSWER
If the buyer struggles, you may not be paid in full. The bank usually gets paid first, so your note often ranks behind it.
Ways to reduce the risk:
- Keep the VTB to a portion of the price you could live without if things went wrong.
- Get security, such as a general security agreement or a personal guarantee.
- Agree on interest, payment dates and what happens if payments are missed.
- Check the buyer's experience and finances carefully.
How is a VTB taxed in Canada?
SHORT ANSWER
If part of your sale price is paid over time, you may be able to claim a capital gains reserve. This spreads the taxable gain over up to five years, with at least 20% of the gain included each year (CRA guide T4037). Confirm the details with your CPA.
What this means for you
The price and how it will be paid (cash at closing, earn-out, vendor financing) is set out in the letter of intent.
Security, clear terms and checking the buyer carefully reduce the risk.
Related: What is a letter of intent (LOI) when selling a business?
